Friday, November 17, 2006

Annual bank earnings season starts in less than two weeks and anything less than a series of gargantuan profits will be a major disappointment.

"We expect that the banks' string of profitability will remain unbroken in the fourth quarter of 2006, with respectable levels of earnings to be reported by all institutions," said Dundee Securities Corporation analyst Susan Cohen.

But with that performance already built into bank stock prices, how do you pick which one gives the best return?

Ms. Cohen has narrowed down the choice for the year ahead, based on the assumption that earnings growth will slow to less than 10% for all the banks, but to around 5% for some.

"[Previously] we had mentioned that we expect only Toronto-Dominion Bank, National Bank and Royal Bank of Canada to provide investors with double-digit return over the next 12 months," she said in a note.

However, with RBC's stock outperforming most of its major rivals last week, jumping 2%, compared to 0.6% for the sector, the number of banks likely to provide investors with returns of more than 10% in the next year has fallen, said Ms. Cohen.

"The list is getting thinner, with only TD and National Bank filling this criterion," she said.

Meanwhile, notes Ms. Cohen, four banks could hike their dividends this quarter. The government's clampdown on trusts has sent cash scuttling to the banks where steady dividend payouts are perhaps the closest proximity for investors to the trust's distributable income. And some bank dividends are set to become even more attractive.

"We anticipate Canadian Imperial Bank of Commerce, Bank of Montreal, Bank of Nova Scotia and National Bank will announce dividend increases in conjunction with fourth quarter 2006 earnings releases," said Ms. Cohen.